COMMENTARY

Who Dictates Oil Prices?

While Oil and Energy Ministers decide production adjustments during the meetings of the OPEC Conference, these officials still act closely with the oil majors for the mutual benefit of OPEC member-countries and the oil companies.

Oil companies’ strategic control of OPEC crude oil production is further strengthened by their domination in the downstream level of the global oil industry. The six oil majors own 186 of the 744 refineries in the world. As of 2003, they also account for 19% of global refining capacity of 112.4 million barrels per day and 16% of global sales of petroleum products of 79 million barrels per day.

By Arnold J. Padilla
IBON Senior Researcher
Posted by Bulatlat.com

The recent P1-per-liter increase in the pump prices of diesel, gasoline, and kerosene is the single largest hike in petroleum prices since October 2001 when the average retail prices went up by P1.20 per liter. For the record, it is the seventh round of oil price hike for the year and the 61st since the downstream oil industry was deregulated in April 1996.

Oil companies cite the rising world oil prices for the increase in local pump prices, as Dubai crude hit US$35.8 per barrel in the second week of May. In March, Dubai crude averaged US$30.8 per barrel then climbed to US$31.7 per barrel in April.

The Department of Energy (DoE) says the latest adjustment is “reasonable” based on their “secret” pricing formula. Like the oil firms, government wants the public to believe that it is helpless in the face of increasing world prices. Oil companies supposedly only reflect global price movement in the domestic market.

If we were to believe the oil firms, oil prices are high and continue to increase because of the cartel-like operation of the Organization of Petroleum Exporting Countries (OPEC). Starting April 1, the 11-member organization reduced its production by 1 million barrels per day, which drove oil prices up. DoE secretary Vincent Perez says the June 3 meeting of OPEC is critical in determining whether the uptrend in global oil prices would continue.

The Myth of an OPEC Cartel

According to the US-based Energy Information Agency (EIA), OPEC controls 40% of world crude oil production and 67% of estimated world crude oil reserves. In addition, OPEC exports also account for 55% of internationally traded crude oil. Thus, by imposing production adjustments, OPEC effectively influences the movement of global crude oil prices and consequently, the pump prices at refilling stations.

Such argument conveniently ignores the role of giant oil companies, which exert monopoly control over the global oil industry. These “super-companies” include ExxonMobil (US), Royal Dutch Shell (Britain-Netherlands), British Petroleum (Britain), Total (France), Chevron Texaco (US), and ConocoPhillips (US).

Based on the estimates of the Washington-based non-government organization (NGO) Public Citizen, the major oil firms in the world (with the exception of Total) account for more than 14% of global crude oil production (pegged at 79.1 million barrels per day in 2003). This is nearly as much as the production of all Middle East members of the OPEC.

A significant portion of this production comes from OPEC as these oil companies maintain equity shares in different crude oil production and exploration ventures in OPEC member-countries. Chevron Texaco, for instance, obtains more than 40% of its crude oil from OPEC, while ExxonMobil, more than 25 percent.

Thus, while Oil and Energy Ministers decide production adjustments during the meetings of the OPEC Conference, these officials still act closely with the oil majors for the mutual benefit of OPEC member-countries and the oil companies.

Oil companies’ strategic control of OPEC crude oil production is further strengthened by their domination in the downstream level of the global oil industry. The six oil majors own 186 of the 744 refineries in the world. As of 2003, they also account for 19% of global refining capacity of 112.4 million barrels per day and 16% of global sales of petroleum products of 79 million barrels per day. 

Manipulating Prices

The intense domination and control of the oil majors in the upstream to the downstream levels of the oil industry make them invulnerable to the effects of supply and demand. Such position allows them to dictate the price with which they want to sell their products independent of OPEC’s decision to increase or reduce crude oil production.

The competitive forces of supply and demand have never determined the pricing of oil in world trade. Writing in the 1970s, Dr. Ibrahim Oweiss averred that world oil prices have been actually “administered, controlled, and manipulated” by international oil companies, mainly by the so-called Seven Sisters: Standard Oil of New Jersey (which became Exxon), Standard Oil of California (which became Chevron), Standard Oil of New York (which became Mobil), Texaco, Anglo-Persian Oil (which became British Petroleum), Royal Dutch Shell, and Gulf Oil (bought by Chevron).

Oweiss wrote: “In my view, those companies having owned most of the oil in the world through oil concessions pursued an oligopolistic policy to maximize their profits. By keeping the price of oil low, they paid fewer royalties as they were usually a percentage of the posted price. Furthermore, they marketed their cheap oil to their parent companies, to their own refineries, and/or to their own downstream operations, thus widening the gap between the cost of the main input, namely crude oil, and the revenues from the sale of the final products.”

Not much has changed since then. In fact, through mergers and acquisitions, giant oil companies have become even more powerful and influential in determining oil prices. In the US for instance, the multiple large, vertically integrated oil companies made the oil market uncompetitive. The five largest oil companies in the US (ExxonMobil, Chevron Texaco, ConocoPhillips, and Royal Dutch Shell) control 48% of domestic oil production, 50% of domestic refinery capacity, and 62% of the retail gasoline market.

Such concentration allows these companies to easily control gasoline prices in the US to rake more profits. According to Public Citizen: “In March 2001, the US Federal Trade Commission (FTC) concluded that oil companies had intentionally withheld supplies of gasoline from the market as a tactic to drive up prices, all as a profit maximizing strategy.”

A congressional inquiry also uncovered “internal memos” written by major oil companies in the US discussing their successful strategies of forcing independent refiners out of business, resulting in tighter refinery capacity and consequently, increased prices and maximized profits. From 1995 to 2002, more than 892,000 barrels per day of capacity coming from small refiners have been shut down.

The Philippine Setting

Some of the oil giants are also the dominant players in the Philippine oil industry. Royal Dutch Shell, for example, controls Pilipinas Shell while Chevron Texaco owns Caltex Philippines. Petron Corporation, on the other hand, is jointly owned by the Philippine National Oil Company (PNOC), which has a 40% share, and the Saudi Arabian Oil Company (Saudi Aramco), which also has 40 percent. The remaining 20% are owned by more than 500,000 individual subscribers.

Chevron Texaco and ExxonMobil used to own Saudi Aramco until it was nationalized in 1980. However, Saudi Aramco still maintains strategic partnerships with the oil majors. It has joint ventures with Royal Dutch Shell and ExxonMobil in refining and marketing of petroleum products. 

Pilipinas Shell, Caltex Philippines, and Petron Corporation are the so-called Big Three of the local oil industry. Together, they account for 83% of the total number of pump stations nationwide, 86% of petroleum products sold in the domestic market, and 100% of the country’s refining capacity. They are also among the 10 biggest corporations in the Philippines.

Like in most countries where they operate, the oil majors control as well domestic crude oil production in the Philippines such as the US$4.5-billion Malampaya Deep Water Gas-to-Power Project in offshore Palawan. A joint venture of the PNOC-Exploration Corporation (PNOC-EC), Shell Philippines Exploration (SPEX), a unit of the Royal Dutch Shell, and Chevron Texaco develops and operates the upstream component of the Malampaya project. SPEX and Chevron Texaco each have a 45% stake in Malampaya.

Because of limited domestic crude oil production, oil firms in the Philippines import crude oil or refined petroleum products. The advantage of the oil majors over the new players, however, is that they do not only have their own refineries but they also source their imports from their own parent companies or affiliates.

Petron Corporation, for instance, sources 90% of its crude oil requirement from the upstream operation of Saudi Aramco. The company then refines its crude oil in its Limay, Bataan plant and retails the finished petroleum products in its 1,188 pump stations nationwide. Such vertical integration is also true for Pilipinas Shell while Caltex Philippines now imports refined oil from its own affiliates in the region.

This makes the pump prices of Petron Corporation, Pilipinas Shell, and Caltex Philippines invulnerable not only to OPEC production adjustments but also to the rudiments of free market competition.

This explains why deregulation has not substantially affected their domination of the local petroleum market. On the contrary, a deregulated regime has merely given the oil majors more room to manipulate prices since their transactions with their parent companies or affiliates abroad became even more nontransparent while price adjustments are no longer subject to public hearing. IBON Features / Posted by Bulatlat.com

IBON Features is a media service of IBON Foundation, an independent economic policy and research institution. When reprinting this feature, please credit IBON Features and give the byline when applicable.

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